How to build an ethical or sustainable client portfolio

This article is part of
Guide to investing for good

How to build an ethical or sustainable client portfolio

Advisers may have many clients interested in constructing portfolios which are purely invested ethically or sustainably, while others may never have had an enquiry from a client about this type of investing.

A recent political development may mean advisers will have to be far more aware of their clients’ needs in these areas.

“On 24 May, the European Commission unveiled its first sustainable finance package,” Hortense Bioy, director, passive strategies and sustainability research, manager research at Morningstar acknowledges.

“Advisers could be required to ask their clients about their preferences concerning the environmental and social impacts of their investments and integrate these in the product selection and suitability assessment process.”

So if and when the question does come, what can advisers do? How should they be prepared to help to build a portfolio which incorporates environmental, social and governance (ESG) concerns?

Product availability

Firstly, advisers need to know what products are available to their clients.

Julia Dreblow, founder of sriServices and Fund EcoMarket, suggests there are now more than 40 providers of ethical or socially responsible investing (SRI) portfolios, some of which offer multiple ethical approaches, as well as multiple risk levels.

“For advisers or businesses looking to develop their own proposition, two sets of information are required: standard financial analysis (that which would be used to construct any portfolio), and information on ethical/SRI fund strategies,” she explains.

“Reliable information on a fund’s ethical, social and environmental strategies is essential as it ensures the portfolio can be clearly explained to clients and guards against potential mis-selling risks.”

Historically, one of the barriers to wider adoption of this type of investing by both asset managers and by investors themselves has been the confusion around the various definitions.

Perry Rudd, head of ethical research at Rathbone Greenbank Investments, admits: “There’s a problem around the terminology used in this space and descriptors such as ‘ethical’, ‘sustainable’, ‘responsible’ are often used interchangeably.

“This is wrong, as there are clear differences between the approaches, though much overlap too, hence the challenge.”

He urges advisers to ensure they have a “good grasp” of the range of definitions so they can fully assess the products or services they are considering for their clients.

This is why it is crucial to establish with the client just what they mean by ‘constructing a sustainable portfolio’.

Both advisers and their clients should be ready to ask questions - advisers should be asking clients what they want, and clients should be aware of their own preferences, or at least be armed with questions about some of the different options available to them.

Amanda Tovey, investment manager and head of SRI at Whitechurch Securities, says: “Clients need to consider whether they want to take a positive approach, such as impact investing, where they look to invest in companies which are making a positive contribution to society and the environment - by their very nature, this often leads to exclusion of key areas clients may wish to avoid, such as tobacco production and arms manufacturing.